With profits endowment
with profits endowment policies are normally enhanced with regular bonus payments. Bonuses are added to the sum assured and once added can be withdrawn at certain times, usually at death or maturity and possibly other times specified in the product terms.
One of the most popular endowment policies sold in the UK is a with-profit endowment. Offered by life assurance companies, with-profit endowments pay the buyer a fixed sum (called the basic sum assured), in addition to earnings from investments made by the company. The basic sum assured plus the investment profits are paid after a predetermined length of time, as long as the policy holder has also been consistent with the monthly payments they agreed upon.
Bonuses may be added annually (known as the reversionary bonus) and at the end of the term (a terminal bonus) depending on investment performance.
There are two options offered for with-profit endowments:
“Low-cost” With-Profit Endowment – does not come with a guarantee for the full value of the loan. Rather, only a portion of the mortgage loan amount is assured of being returned to the policy holder by the end of the policy’s maturity period. This is the less expensive option if you can deal with the higher level of risk. When the endowment matures, profits from the company’s investment are added to the lump sum (through a bonus system) to recover the rest of the loan’s value.
Full With-Profit Endowment – includes a guarantee for the full value of the loan by the end of the maturity period. Usually more costly, it also offers the policy holder the lowest level of risk because whatever happens, they still recover at least the whole amount of the mortgage loan, plus bonuses if the company’s investments turned out to be profitable for the duration of the endowment’s maturity period.
Low start endowment.
Low start endowments are another type of with profits policy where bonuses are added to the endowment sum assured.
First time homeowners find low start endowments attractive because it allows them to match their expenditure with the starting level of their income and then lets it grow in pace with their (ideally) upward financial mobility.
A low start endowment features smaller initial premiums that progressively get higher over time until the endowment matures. Payments are usually at their highest by the last 15 years of the policy.
A policy is written say for a total term, say to the age of 65, with options to encash after 10 years without penalty. The policies are usually written in segments to allow some to be encashed and some to be continued. This may be suitable for school fees planning.
Unit linked endowment policies.
Premiums buy units in a fund of the investor’s choice. Units will be cancelled each month to buy life cover. There is investment flexibility as funds can be switched.
Units will be purchased at the offer price and sold at the bid price (usually lower) incurring a bid offer spread charge of around 5%. Set up costs will be taken off the fund value.
A non-profit endowment, as the name suggests, has no stock investment component. It is not designed to pay off a mortgage; rather it is bought for the life cover it provides. As such, it is not a very popular choice for endowments as most buyers purchase endowments in order to help them pay off their mortgage loans.